Business and Personal Tax Updates
Issue 34 – February 2014
When it comes to employee gifts, awards and prizes, do you know what is considered a not-taxable benefit and what needs to be taxed? That’s one of the topics in this month’s newsletter. It’s not as black and white as you may think.
Also in this newsletter, two Tax Court rulings. One on whether an employee’s auto expenses are deductible and the second on an audit that went beyond the accounting records. When it comes to making decisions where claiming expenses and reporting taxes are concerned, it’s best to get professional advice before you act.
Tax season is in full swing. We’re here to help you with completing and filing your personal tax return. If you have questions about your personal or business taxes give us a call.
P.S. As a favour to a friend or business colleague, feel free to forward this email to those who you think could benefit from the information below.
GIFTS TO EMPLOYEES: Non-Taxable?
According to the CRA:
1. Up to $500 in gifts and awards per year per employee can be paid out as a non-taxable benefit under the CRA’s “gifts and awards policy”. A “gift” is defined as recognition of a personal event or milestone in an employee’s life, such as a birthday, marriage, retirement or the birth or adoption of a child, or as recognition of a public or religious holiday where gifts are traditionally exchanged, such as Christmas or Hanukkah.
An “award” has to be for an employment-related accomplishment such as outstanding service, employees’ suggestions, or meeting or exceeding safety standards. Performance based “awards” (such as exceeding production standards, completing a project ahead of schedule or under budget, putting in extra time to complete a project) do not benefit from the exemption and are therefore taxable benefits. The difference between a regular “award” and a performance based “award” is very slight and very grey. As such, the safest way to make a tax efficient payment to an employee is as a “gift” described above.
2. The “gifts and awards policy” also only applies to non-cash items. Cash, and near-cash items such as gift cards and gift certificates, are not included in the policy and are always taxable, regardless of the reason they are given.
The rules in Quebec are slightly different.
3. The “gifts and awards policy” cannot be used against taxable parking or employer-provided transportation because the policy cannot be used to make otherwise taxable benefits non-taxable.
4. Prize draws or lotteries are not included in the “gifts and awards policy”. Generally, where all, or a majority of, participants in an employer- promoted contest are employees and their family members, any winnings are considered a taxable employment benefit.
Whether winnings from a prize draw held by a social committee is a taxable benefit depends on whether the social committee is funded or controlled by the employer.
Action Item: See www.cra.gc.ca/gifts for specific details.
EMPLOYEE EXPENSES: Not Deductible?
In a July 9, 2013 Tax Court of Canada case, a group home counselor took residents of the group home shopping, to medical appointments, and to recreational activities as part of his employment duties. The employee argued that it was an implicit term of his contract that he incurs expenses for the use of his own personal vehicle and, therefore, the amounts should be deductible on his personal tax return.
Taxpayer loses The taxpayer’s manager noted that many employees do not use their own vehicle for transporting residents and instead take a taxi or public transportation.
Because the employee was not required under his contract of employment to use his vehicle, the Court disallowed the expenses.
Consideration Item: This may apply to a wide range of employees, including those who have received T2200s from their employers. A T2200 (Declaration of Conditions of Employment) is the form signed by employers that allow employees to deduct certain employment expenses from his or her income.
GETTING AUDITED: Net Worth Assessments
In a May 14, 2013 Tax Court of Canada case, two taxpayers carried on a fishing business that was being audited. The CRA auditor applied a net worth calculation to estimate their earnings because he was unable to reconcile the income from the accounting records to the growth in their assets, largely fishing licenses.
Taxpayer loses The taxpayers argued that the CRA should not have used the net worth method, but confined their review to the accounting records. The Court noted that maintaining accounting records is not sufficient – they must be reliable, credible and accurate – and the disparity between the growth of their assets and the income reported justified use of the net worth method.
Action Item: Maintain reliable accounting records!
TAX TICKLER … a quick point to consider…
You may be able to save approximately 2% in personal taxes if you declare, and pay “non-eligible dividends” in 2013, rather than 2014.
Contact us for further details and planning possibilities.
Donna Mazerolle & Associates provides:
- Strategic Planning
- Business Plans
- Accounting and Bookkeeping
- Growth Strategies
- Budgeting and Forecasting
- Growth Management Strategies
- Turnaround Strategies and Management
- Help with Sourcing Funds
The preceding information is for educational purposes only. As it is impossible to include all situations, circumstances and exceptions in a newsletter such as this, a further review should be done by a qualified professional. Although every reasonable effort has been made to ensure the accuracy of the information contained in this newsletter, no individual or organization involved in either the preparation or distribution of this letter accepts any contractual, tortious, or any other form of liability for its contents. Do you have questions… give us a call at 506-657-4067 or 1-800-650-4067 (outside Saint John).